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About the stock: Federal Bank is an old private sector bank based out of Kerala with 1355 branches and 1916 ATM across various states.

        * Market share in advances and deposits was at 1.28% and 1.14%, respectively, as of March 2023

        * Balanced loan mix with retail: wholesale mix of 54:46

Q4FY23 Results: Healthy business growth; treasury gains offset decline in margins.

        * Advances grew 20.1% YoY, 3.7% QoQ at | 1.77 lakh crore. Deposits were up 17.4% YoY, CASA growth at ~4% YoY

        * NII up 25.2% YoY, de-grew 2.4% QoQ. NIMs down 18 bps QoQ at ~3.3%

        * Higher treasury gain at | 192 crore; core fee grew 20% YoY • GNPA largely steady at 2.4%. Restructured book at 1.6%

What should investors do? Federal Bank’s share price has increased ~38% in the past year. The management has successfully delivered as guided in the past on majority of the parameters, which gives us confidence.

        * Thus, we maintain our BUY rating

Target Price and Valuation: Federal Bank is expected to deliver credit growth higher than industry and RoA of ~1.3-1.35% in FY24-25E. Hence, we value Federal Bank at ~1.3x FY25E ABV and revise our target price from | 165 to | 160.

Key triggers for future price performance:

     * The management maintained their guidance of high teen growth in advances with continued focus on unsecured segment to aid margins and, thus, RoA at 1.3-1.35%

     * Building of distribution network (plan to add 100 branches in FY24E) to result in a gradual improvement in CI ratio

     * Steady credit cost led by improvement in asset quality to aid earnings growth

Alternate Stock Idea: Besides Federal, in our coverage we also like IndusInd Bank.

    * IndusInd Bank is a Hinduja group promoted newer age private sector bank with a strong pan-India presence of 6491 branches

   * BUY with a target price of | 1450

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